Jim Chanos: We’re In The Golden Age Of Fraud

Ed Elson and Scott Galloway are joined by Jim Chanos to discuss the biggest risks he sees in today's AI-driven market and the warning signs that remind him of the late stages of the dot-com bubble. He also breaks down the companies he's long and short on, explains why he's increasingly concerned about fraud in the market, and shares the advice he'd give to young investors navigating today's environment. Jim Chanos is the Founder and Managing Partner of Chanos & Company, formally known as Kynikos Associates, the world’s oldest exclusive short selling investment firm. Subscribe to the Prof G Markets Youtube Channel Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 1:23Scott Galloway?

  Today's number 25. That was the percentage decrease in Canadian travel to the US in 2025. Ed, what did the beaver say to the maple tree?

• 1:33Ed Elson?

  What's up?

• 1:34Scott Galloway?

  It's been nice knowing you.

• 1:46Scott Galloway?

  How are you, Ed?

• 1:47Ed Elson?

  I'm doing very well.

• 1:48Scott Galloway?

  Yeah, say more.

• 1:49Ed Elson?

  The weather's nice. I've been going out to Long Island, getting tan, had a wedding this weekend, which was nice.

• 1:56Scott Galloway?

  Oh, you're at that age.

• 1:57Ed Elson?

  Yeah, the weddings, they're happening, they're coming. Every other weekend, it feels like, at first it's fun and then it gets a little that you're like, wow, it's a lot of, a lot of trekking out. But it was a beautiful wedding and a really good time. So, you know, I'm very, very happy for my friends.

• 2:15Scott Galloway?

  In two or three years, you'll experience the do-overs where people realize like, we only got married because we were 27 and it didn't work. So there'll be a few of those. In 10 years, that's when the really ugly divorce is set in because they have kids.

• 2:26Ed Elson?

  Okay.

• 2:27Scott Galloway?

  Then in about 20 years, you'll go to the second weddings. When you decide to tie the knot, I just can't wait. I wish I would be a fly on the wall when you have a very rational conversation around you suggesting that you take the money for the wedding for a down payment for a house. You're the kind of guy that would suggest that. And I just wish I could see.

• 2:46Ed Elson?

  Actually, I think it's the opposite. I think I want the awesome wedding and to splurge on the, on the, on the party. And I think, I don't think she cares that much about it. But I think, I think having a sick wedding is, I think you've got to have a sick wedding. I'm a little, I'm a little, probably, probably my head screwed on quite straight on that one.

• 3:03Scott Galloway?

  What I would suggest is just throw a huge party and don't tell anyone it's a wedding. Because when people hear the term wedding, they mark everything out by 50%.

• 3:11Ed Elson?

  That's a really interesting point. Yeah. Maybe just don't get the wedding planner, get an events planner. Pretend that you're sort of celebrating your birthday and then you kind of Trojan horse a wedding. It's an interesting, interesting strategy.

• 3:24Scott Galloway?

  Or if you do what I did, just go down to City Hall with a woman who looks like she's about to start dilating and get married in front of a judge. That was the room, that was the romance I brought. And we had to call four different people to get a witness that morning. That's how I express my love and my undying commitment.

• 3:43Ed Elson?

  I love it. I love it. So you're not a fan, are you not a fan of a big wedding? Or where do you stand on the issue?

• 3:49Scott Galloway?

  So first off, what you have to acknowledge is in all of these decisions, you're an influencer, not a decision maker. And that is, I'm, I'm a big believer in dividing and conquering in a partnership. And in my partnership, I'm in charge of money and movies and everything else. She decides because she has much better instincts and judgment than I do across everything. So she pretends to listen to me and she nods.

• 4:16Ed Elson?

  Right.

• 4:16Scott Galloway?

  You know, I say, well, you know, we should stick in the US for high school kids. She's like, oh no, we're moving to Europe. I'm like, okay, just tell me where to be when. Just tell me where to be when. Send me the address. So, but yeah, get used to that. Decide, pick one or two things you're really good at and just acknowledge every other decision is going to be made by your partner.

• 4:39Ed Elson?

  Okay. Money and movies is a good, that's a good combo. That's a, that's, that's fun to be in charge of those two things. And you're good at both of those.

• 4:47Scott Galloway?

  I'm outstanding at, at both of those things. Yeah, that's, that's my value add. Speaking of money, let's get to our, let's get to our guest.

• 4:55Ed Elson?

  Let's do it.

• 4:57Ed Elson?

  Our guest today is one of the most famous short sellers on Wall Street. Over the years, he's been given nicknames such as the Darth Vader of Wall Street and also the LeBron James of short selling. He first made a name for himself in 1982, when as a junior analyst, he urged clients to bet against a piano manufacturer that had expanded into insurance. Just months later, the company filed for bankruptcy. But he is perhaps best known for calling the collapse of Enron before it imploded. That bet cemented his reputation as one of Wall Street's most respected skeptics. Now he is sounding the alarm once again, this time about AI.

• 5:38Ed Elson?

  He has argued that today's AI boom may be an even bigger bubble than the dot com era. So we wanted to understand why one of Wall Street's most successful contrarian investors thinks the market has become so euphoric and what he believes investors are missing. Here is our conversation with the legendary short seller, Jim Chanos. Jim, great to have you on the show. Thank you for joining us. I'm going to start with a simple two-part question for you. Is this market in a bubble? And if so, is it going to pop?

• 6:11Speaker 05

  The market is very, very expensive. I learned a long, long time ago, about 40 years ago, when I started my firm, that the market was inherently predictable, but that there were companies and sectors within the market that are often much more predictable. And, and so I don't know if the market broadly speaking is in a bubble. It's certainly quite expensive as expensive is pretty much it's ever been, right up there with the, with 1999, 2000, the dot com bubble you reference. But look, I mean, it's been expensive for a number of years.

• 6:52Speaker 05

  However, what we are seeing right now is an unprecedented capex boom. And, and capex booms tend to end badly. They tend to leave behind very productive assets as they did during the dot com telecom build out or going back further, the railroad build out of the 19th century. But investors often get burned along the way in financing that build out. And that's my concern right now, particularly as it relates to the physical assets related to AI.

• 7:26Ed Elson?

  What are some of the biggest concerns that you're seeing in the market as it relates to AI? There are several things going on. There's the circular financing, there's the explosion in AI debt, there's the fact that the debt appears to be increasingly going off of the balance sheets of the hyperscalers and stuffed into these SPVs. I mean, there's a lot going on to be sort of skeptical of. Which things do you see as the largest concerns in AI right now?

• 7:53Speaker 05

  Well, if we go back to the, to the dot com analog, most of the spending that was done, and Scott knows this, back in the late 90s was by enterprise and, and by relatively profitable telecom companies. The, the spending by the dot coms and the CLEX and the fiber guys was relatively small amount of the total capital spending. The, the companies that had in effect unprofitable business models that remained unprofitable and basically a lot of them went bankrupt. Most of the spending was done by AT&T, by, by Bank America, by Coca-Cola, who were networking

• 8:38Speaker 05

  their systems together to take advantage of the internet. And then on top of that, you remember we had the Y2K. And I remember my firm, we replaced all our PCs in 1999. So a lot of the capital spending.

• 8:55Speaker 05

  Budgeting and spending was by fairly profitable companies. What happened in the dot com era was that they just got too optimistic in terms of how much they needed and order books collapsed beginning in late 2000 into 2001. And so S and P earnings collapsed 40% from the middle of 2000 to the middle of 2001. They dropped as much as they did during the global financial crisis, which a lot of people find hard to believe. And so nowadays, we are seeing much, much more concentrated capital spending in the

• 9:35Speaker 05

  form of build outs by the hyperscalers, by the so-called Neo clouds and by the AI companies themselves. So we're seeing a lot more risk in a lot smaller subset of the market. The broader question, of course, is, is will there be a return on this investment? And I think that that question is, is remains to be seen. I pointed out to people, interestingly, the US GDP growth in the 10 years prior to Netscape

• 10:14Speaker 05

  was exactly the same as it was in the 10 years post Netscape from basically 1996 to 2007. And S and P profits, which have a long-term sort of trend growth rate of about 6% a year, S and P profits grew 6% in the decade before Netscape, 6% per annum, and they grew 6% per annum in the decade after Netscape. So for all of the wonderment of the internet, and it's certainly changed their lives and it brought forth all kinds of new businesses and killed a lot of old businesses, you wouldn't

• 10:55Speaker 05

  have really kind of noticed it in the aggregate economic or even arguably financial statistics. And so the question will be, what will AI bring in the form of productivity? What will it bring in the way of enhanced profitability? And, and how much of that is being front loaded today? And that's a big question because like the dot com boom, we have an accounting identity problem that, that follows these capex booms, namely that the companies that are spending the money do not expense immediately most of that money that's being spent.

• 11:38Speaker 05

  It's capitalized and depreciated over five to 10 years. The companies receiving a lot of that money, the Nvidia's of the world, the Caterpillar tractors of the world, the utilities, they're receiving it in terms of revenues and profits immediately. So the same dollar is basically contributing to profits in a far greater extent than it does in a more normalized economy, where it would be recognized as revenue by one company and expense by another. And that's what we're seeing, and that's why S and P profits have taken off in the last two years. It's because of this mismatch.

• 12:17Ed Elson?

  Could you describe more, speak more to this, this expensing problem? Because I think a lot of the argument as to why we shouldn't be worried about any of this is, one, GDP growth is growing as a result of AI. Two, S and P earnings are also growing because of AI and significantly. And then three, a lot of the financing, a lot of the debt that, that was kind of the, the undoing in previous cycles. I mean, it's coming from companies that actually do have significant profits, that actually do have significant cash flows, and that you could make the argument that actually

• 12:57Ed Elson?

  they have the money and the credit to build the amount of data centers that they are building. So what would be your response to people who make that argument? And how does that relate to these expensing problems and perhaps these accounting problems that you bring up?

• 13:13Speaker 05

  Well, all three of those were present in 1999 and 2000. As I said, the companies that were taking on the most debt and obligations to build out their networks were by and large the largest, most credit worthy companies in the United States. And so, so that, that happened then. And, and it's really an important point to make. However, there was also a mismatch. S and P earnings grew 30% from mid 98 to mid 2000. So they're growing even faster today, but then, as I said, there was a collapse. We had a mild corporate recession.

• 13:53Speaker 05

  I think GDP dropped 1% and corporate profits dropped 40%. And they dropped because order books collapsed. People realized they didn't need 10,000 routers. They needed 2,000. So they canceled their order books, but the guys who were building the routers, you know, had, had expense levels that were predicated on, on the boom lasting longer and growing further than it actually did. So this mismatch in earnings is, is substantial right now. It's in the hundreds of billions of dollars a year and is, is the real reason that corporate profits are growing way above trend.

• 14:34Speaker 05

  I mean, I think the economy, we agree, is, is doing fine, which means corporate profits maybe should be growing eight or nine, but they're growing somewhere like 28 or 29. So you get an idea of really just how much of the profitability is going to the chip companies and to the infrastructure companies for this buildup. So then the question becomes, and Scott's a better judge of this, I think, than I am, is what is the ultimate ROI on all this spend? And, and can, can we take the tokenized economy and turn it into real productivity gains

• 15:15Speaker 05

  for Bank America and Coca-Cola and 3M and, and my company and, and Riverside and what have you? And, and that I think is a little bit more nebulous right now in terms of what, what companies are seeing and, and relative to their spend.

• 15:33Scott Galloway?

  Jim, it's, it's nice to finally meet you. I've been following your work for what feels like three decades. And, and yes, I do remember the dot com era. I still am nursing those wounds. The, the economists perfectly called the dot bomb implosion. They said it would go from B to C, then to B to B, then the infrastructure guys would be hit. They just laid it out, the implosion perfectly. They laid it out though in 1997, and from that point, the Nasdaq tripled. And the question I would have for you is, do you think we're in 97 or 99? And I think you're going to say we're in 99, but how do you discern the difference between something that's overvalued and things are about to go insane versus we're, we're in, you know, we're in the beginning of the end, if you will.

• 16:16Scott Galloway?

  Is there a way to tell if we're in 97 or 99?

• 16:19Speaker 05

  Well, first of all, I would argue, Scott, that, that, tell me anything in the corporate world or the technology world that hasn't gotten faster since 1997.

• 16:29Scott Galloway?

  Yeah.

• 16:30Speaker 05

  So in terms of the ability of investors to sort of react to things, in my experience has been time compressed dramatically in, in, in the last 30 years. So these things get, get sort of figured out much quicker than they did back when I was shorting iOmega and scouring the Yahoo message boards, you know, to, to figure out whether it was overvalued or not. So that's number one. Number two, we are not so close to, to the ignition point as we think. I mean, ChatGPT was fall of 2022. So we're now entering the fifth year of this.

• 17:13Speaker 05

  It's not, it's not the Netscape moment of 1996, I don't believe. And, and then think of all the VC infrastructure that, and other sort of ecosystem around technology that exists today to take advantage of these fabulous investment opportunities that really, you know, didn't exist as much in 1996 or 1997. So I would say that, that there's one other indicator, however, that I think has been foolproof in trying to figure out whether you're closer to a beginning or an end, and that is equity issuance.

• 17:56Speaker 05

  And equity issuance really didn't start picking up until, you know, late 98, 99 and the dot com boom and then crescendoed in the first quarter of 2000. We haven't had a lot of equity issuance. We had a blip in 2021. At one point, post GameStop, SPACs were raising about 2.5 to 3 billion a night, which at the time was equivalent to the US savings rate. And of course, we know how that ended. It didn't last long and gave retail investors some indigestion in late 21 and 22.

• 18:40Speaker 05

  2026 is an entirely different animal as SpaceX would indicate. We are now seeing massive equity issuance and we're going to probably, you know, unless things really cool off a lot faster here, we're going to see probably record amounts of equity issuance in 2026. And so I've always joked that Wall Street has a printing press as well as the Fed. It just takes a while to get it going. And Wall Street's printing press is now going full bore in this year. So I think that there's a fair amount of indicators that are telling us

• 19:22Speaker 05

  we're closer to a 99 type moment than a 97 moment, but who knows? And by the way, so I do my investment conference every year. We used to have it in Miami in February and in February 2000, we met and we were about 10 days away from the peak. We didn't know it, but one fellow gave a short and pointed out that it had doubled in 1999, it had doubled in January of 2000, it had doubled again in the first two weeks of February 2000 and did a final double the week of our conference, which was the third week of February. So to one of your points, I mean, when you're in a parabola,

• 20:06Speaker 05

  you know, you have price risk, if not time risk. And as a short seller, I'm well aware of that.

• 20:12Scott Galloway?

  So the market being at near historic highs in terms of valuation, rational argument. AI being the epicenter for driving that, what feels like irrational valuations, also very rational. When you look at within the AI ecosystem, assuming that's sort of ground zero for leverage upon leverage or the tail of the whip of overvaluations and presenting opportunities for a short seller such as yourself or someone who shorts the market. Are you, do you find the ripest targets to be the hyperscalers, the Nvidia's, the SpaceX's? Or do you find that it's the adjacents and maybe are less, don't have the same cash flows, the same brand equity?

• 20:56Scott Galloway?

  Like what is the white meat of the white meat or the soft tissue of the soft tissue where you think these things are really, have the potential to go down, you know, 90 plus percent, if you will?

• 21:06Speaker 05

  Since 1996, we run our portfolio or advise our clients to be hedged, right? So we're long, we're long the market and short a portfolio of 40, what we think are structurally overvalued situations. And in the AI space, we focused really over the course of most of this year in the adjacent companies. So we're in effect, long the hyperscalers. We're in effect, long Nvidia since we own them through the indices. But where we've been short are the Bitcoin miners who have suddenly become data center companies,

• 21:46Speaker 05

  the so-called neo-clouds that are not estimated to make money until 2030 or beyond, despite a booming market for what they do. And those types of narratives that have sprung up and companies that have sprung up to take advantage of investor capital, where you can't really make the business model work. And it's getting tougher enough for the hyperscalers. We could talk about that in a few minutes. They are seeing increasingly lower returns on their invested capital. But there's businesses out there that are doing deals

• 22:29Speaker 05

  for sort of low, single-digit, mid-single-digit pre-tax returns on capital who have weighted average cost of capital of 12, 15%. And they're doing it because it's growth. They can announce deals. And similar to the dot com era, those kinds of companies usually are the ones that end up in the most trouble because they're capital intensive, they're low return. And when sentiment changes and the capital markets tighten up, they can't access capital anymore and they collapse. And so there's just a lot of those out there. But I want to add just one other interesting observation about this.

• 23:12Speaker 05

  And as much as the AI and the leverage and some of the accounting and corporate structures are questionable in this boom, the overall stock market itself is a lot more expensive than it was in 1999. And by that, I mean, in 1999, it was the so-called TMT section that you remember, technology, media, telecom, that just had stratospheric valuations. And then there were just lots and lots and lots of companies that traded at 10 and 11 and 12 times earnings. And in fact, value guys did pretty well coming out of the dot com boom

• 23:57Speaker 05

  as those stocks were bid up, as everything else collapsed. Now we're seeing all kinds of sort of what I would call, you know, relatively senior companies or mature companies trading at 40 and 50 times earnings. Take a look at Walmart, take a look at Caterpillar, take a look at, you know, a lot of companies that are not square in the AI height that are trading at extremely, extremely high valuations. One of our favorites, just as an example, is WD-40. WD-40 has grown its revenues and earnings, I think,

• 24:39Speaker 05

  something at about a 3% pace over the past couple of decades, right in line with GDP. And it trades at 40 times earnings. And so, I mean, it's just lots of those kinds of companies that because of the trend of passive index investing and the fact that retail and households have the largest share ever of their assets in stocks, means that the broad market is relatively expensive relative to just technology.

• 25:17Ed Elson?

  We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify or wherever you get your podcasts.

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• 27:55Ed Elson?

  We're back with Prof G Markets. You mentioned some of those kind of funky new names that are data centers, NeoClouds, like CoreWeave and Nebius and all of these other names. And then there's, of course, some of the newer memory names like SanDisk, SK Hynix. I mean, a lot of these companies that suddenly just have exploded. And I think a lot of people would agree that there's probably a lot of speculation going on in there and therefore a lot of risk. Is it your view, though, that Big Tech, Google, Microsoft, Amazon, Meta, that they are relatively safe and protected right now? Or are they just as at risk as anyone else?

• 28:38Speaker 05

  I don't know that they're as at risk, given their balance sheets. We know Google just went into negative free cash flow in this last quarter. These companies are still funding most of their build from internally generated cash. So in that respect, they're in much better shape than some of the other companies.

• 29:02Speaker 05

  But again, that didn't, you know, that didn't prevent General Electric from going down, you know, 40% in 2001, 2002. And increasingly, the returns on that investment that they are increasingly making are dropping. They're still robust, but they're not what they were. And in fact, you know, we tracked that pretty closely. And most of the return on incremental invested capital, that is, how much operating, additional operating profit are you getting from an additional amount of investment? Has been pretty much cut in half for the hyperscalers over the past year and a half.

• 29:46Speaker 05

  And that's, that's a lot. And companies that were earning 100% incrementally on their capital are now earning 25%. And a couple of the companies are now earning in the teens on their incremental investment. And if that continues to deteriorate over the next 12 to 18 months, I think the C suites in Silicon Valley for some of the giants are going to be having some interesting conversations about their continued spend. I know that they feel that they can't, quote unquote, lose the race. But there could come a point, you know, 18 months from now where they're all losing the race.

• 30:27Speaker 05

  And that gets back to our original question, which is unanswerable, which is what is the ultimate ROI on all this spend? Not, not, not for Nvidia or OpenAI or Anthropic, but for you and for me and for, you know, the plumber down the street and corporate, and corporate America. And what, what advantages and what increases to productivity and profitability will that bring? And that, I think, is still the 64, you know, trillion dollar question before the market. Because we haven't seen a lot of that yet.

• 31:12Speaker 05

  We might, and hopefully we will, but that, that will remain to be seen.

• 31:18Ed Elson?

  It seems that the breaking point that you outline in your scenario of what could happen over the next 12 to 18 months, the turning point is when the people in the C suite at Big Tech have that conversation and say, we're not sure that this actually makes sense. Are you surprised that that hasn't happened yet, given the fact that we haven't really seen the ROI yet in AI, that we haven't seen it at the consumer level at least? You know, you point out the, the return on incremental invested capital, which, as you correctly point out, is declining for Big Tech. I mean, why hasn't that conversation happened yet? And do you think that it will happen soon?

• 32:04Speaker 05

  Human nature is still human nature, and this is the shiny new object. And people are still enamored with it. And the boards of directors haven't yet started to ask difficult questions because companies are still making their earnings estimates and generally being rewarded or not completely trashed for it. But as I say, if the trends continue that we clearly see over the past two years, it's going to be hard to keep justifying growing your capital spending, you know, 40, 50% a year, if your operating income is only growing 10% a year. That will get noticed and it will get noticed by the market.

• 32:49Speaker 05

  And it might be already noticed by the market. The hyperscalers are underperforming. You know, the, the big buyers of compute have underperformed in the past sort of three, four months. So who knows? We'll have to see.

• 33:05Ed Elson?

  That has been a fascinating question to me is to what extent are the points that you're making already priced in? And in a lot of ways, it seems that there are certain corners of the market where it is priced in, certain corners of the market where it doesn't, doesn't exist whatsoever. And I can't quite understand what to make of that. And more importantly, what to do about that from an investing perspective? What, what is your view on that?

• 33:34Speaker 05

  Yeah, I mean, I would agree with you. You know, there's, there's still these buckets of speculative capital that keep sloshing around to keep looking for the hot new area. So if we give up on hyperscalers, we buy NeoClouds. And if we give up on NeoClouds, we buy chip companies and memory companies. And if we hire of those, we buy something, we buy Apple, which is hitting a new high, who's not spending any money. So it's, it's as old as stock markets, right? I mean, people just keep looking for the hottest area.

• 34:13Speaker 05

  But I would think that if overall the AI spend begins to, to get pulled back because of lower returns, I think the whole ecosystem, much like the whole ecosystem really prospered in 2024 and 2025, everything went up. Now we're starting to see some discernment. And, and I think that'll, that'll continue if the, if the ROIICs continue to drop.

• 34:43Ed Elson?

  That discernment is, are you seeing that based on what we're seeing in the bond markets? Where there's CDS prices are exploding or perhaps even interest in the, in the stock markets? I mean, the Nasdaq is in correction territory.

• 34:54Speaker 05

  We're seeing in the stock market, there's a lot of, there's a lot of bifurcation going on. I mean, we're having a very good year on the short side. And I think the S and P is within a stone's throw of, of its all time high. And the equal weighted S and P is at all time highs. And yet, under the surface, there are a lot of stocks that are down 20, 30, 40%. So, so it, it has started already.

• 35:20Speaker 05

  It, and by the way, just to go back to the parable, that started in late 99. I would point out that for every stock that kept going doubling, as I indicated, my friend's stock did, you know, at the end of the parabola, there were stocks that were starting to break down, starting in mid 99 and, and not following generally the, I think Amazon peaked in, in the fall of 99 or summer of 99. So this has happened before. And, and yet, you know, you can still see indices and, and certain sectors continue to race to, to all time highs.

• 36:04Speaker 05

  But, but as I indicated, you know, before, the broader problem is, is that the rest of the market ain't so cheap. So sloshing around is, is moving, you know, companies around. I, I haven't looked at Apple recently, you know, Scott, maybe Scott knows, is Apple back at 40 times earnings, 50 times, I mean, something, something like that, non-growing earnings, I think.

• 36:31Scott Galloway?

  It defines what you said. It's a, it's a mature company being priced as a growth company. The, you said something that fascinated me that when I think about looking for shorting opportunities.

• 36:44Scott Galloway?

  You naturally go to the stuff that's most appears to be most irrationally priced. But I find there's, there's, there's risk to the upside that these irrationally priced stocks, you could wake up and they can double. And whereas you mentioned something fascinating that I hadn't thought about, and that is a company like WD-40. I don't, I think the risk that you wake up and it's doubled is much lower than we wake up and find out that as irrational as it is, that SpaceX has doubled. Do you find that in terms of your, your own risk calculation, that the, the lesser risk to the upside of some of these stocks, that these mundane stocks that have risen with

• 37:29Scott Galloway?

  all, with the tide, do you find that those in fact create, in your view, better shorting opportunities in some of the names we talk about?

• 37:39Speaker 05

  To tell you a bifurcated item, I have both in the portfolio. How's that?

• 37:43Scott Galloway?

  Right.

• 37:44Speaker 05

  So I have some, some companies that just are just simply overpriced by any kind of traditional corporate finance metric by, by a hundred percent. And generally those stocks, you know, they're not going to double on you overnight. And generally they've been what, what we call pretty good alpha shorts, right? They've been flat for years as the market has gone up. Then you have the hopes and dreams stocks, right? And, and, and for the hopes and dream stocks, you need the market to help you out, right? You need the stock market to go down and retail investors to actually lose money. And that's when the hopes and dream stocks go down 90%. You know, WD-40 is not going down 90%.

• 38:28Speaker 05

  But, but, but the hopes and dream stocks really are the ones that, that, you know, have the most risk and should therefore be sized accordingly in your portfolio at smaller positions or via puts or, you know, variety of different ways you can express your view without taking inherently unlimited risk that you have on, on a classic short position. So there's, there's, there's a few ways we figured out how to do that after 40 years. But, but look, you can't, you can't avoid it. Those types of names are the ones that excite retail people.

• 39:09Speaker 05

  I would take you back just a few years when we were short similar kinds of things like Peloton and Beyond Meat. And it wasn't so long ago that those stocks were up 10x before they dropped 90, 95x. So it's, it's an exciting game and, and, and mad me.

• 39:32Scott Galloway?

  So I want to double click on the idea, the mechanics. So SpaceX comes out at 80 times revenues, it goes to 120 times revenues. And call me a boomer, I just, I just can't, I can't wrap my head around that. And so I think, okay, this is an opportunity to short it. And then I think, well, I know what I'll do. I'm, I'm not a sophisticated investor around shorting. I'm going to go buy puts. And what I find out is that puts are really expensive, that word is out that this might be overvalued. And then I think, well, okay, I'm going to sell calls. That creates its, that has its own inherent risk, right? What, you guys look at every which way but lose to express a viewpoint in the most advantageous

• 40:14Scott Galloway?

  way in terms of risk to reward, recognizing the market's pretty good at calibrating stuff. But what mechanics around expressing a viewpoint around a stock being overvalued is in your view, your optimal means of expressing that viewpoint? How do you go and you, how does Jim Chanos go short in what you think is the most thoughtful risk adjusted way?

• 40:39Speaker 05

  Well, again, we, we beta adjust our portfolio, number one. So, so really highly volatile situations like a SpaceX or whatever will be very small positions relative to, to a core position that, that might be much greater. That's number one. And, and a portfolio of 40 names goes a long way of diversifying you, particularly if you earn things like WD-40 or whatever. You, you, you diversify away a lot of that idiosyncratic, you know, short side risk on the upside and I give away the potential reward as well.

• 41:22Speaker 05

  So it's, it's an alpha game on the short side. And the idea is you find enough, enough really bad business models that, that, that the one or two that are going to just be double you like Tesla did for us in 2019 and 2020. And by the way, Tesla, Tesla was a two to three percent position during that period for us. And, you know, and we just had to keep cutting it back because it just kept going up and up and up and up. And to keep it at two or three percent. So you have to, you have to do, use dynamic risk mitigation as well. If something's going against you on the short side, you can't just let it run. You have to trim it to keep it within your risk parameters.

• 42:06Speaker 05

  And, and the same thing on the downside, you have to add to it. So there's a lot of paradoxes in the short side and that's, that's the biggest one. Things that go against you become bigger and things that go your way become smaller. It works against you in an individual way. However, in a portfolio of 40 names, you know, you're always going to have, you know, names that are working, names that aren't working, and most of them just mucking about. So it's a matter, matter of structuring the right portfolio, not being too concentrated in one area like AI. You know, we have a number of AI shorts. It is not an AI short fund.

• 42:48Speaker 05

  You know, it's, we're in all kinds of diverse consumer industries, financials, all kinds of things. So again, trying to, for our clients, just build a portfolio that makes the most sense for business models that just inherently are unprofitable or will never be profitable or are about to be unprofitable. And, and then combine it with the right passive indices on the other side. So a SpaceX, the hedge against the SpaceX is different, I guess, versus the hedge against the WD-40. So it works on the asset side of the balance sheet too.

• 43:25Scott Galloway?

  The tone I'm getting from you that's surprising to me is I always think of Jim Chanos as like a maverick cowboy, like taking extraordinary risks, sort of the, the Bill Ackman, you know, you're concentrated if you have conviction and if you're not, you don't have conviction. And what I hear from you is something we talk about a lot, and that is no one individual is bigger than the market and the key is diversification. And you sound, quite frankly, just like a very thoughtful, I don't want to say conservative, but tempered, you know, hedge fund manager. Have you always been like that? Or as have you, as you've gotten older and have registered, you know, idiosyncrasies of the market, you've become a little bit more measured and recognize that, okay, let's

• 44:10Scott Galloway?

  have 40, not, not, not four. Have you changed over time or is the perception of you being a maverick a little bit outdated?

• 44:17Speaker 05

  We were cowboys from 1985 to 1995. We ran much more concentrated, ran, ran on margin and made a fortune from 85 to 90, 1990, 91, and then gave a lot of it back from 91 to 95. And we had a client who was a fantastic client of ours for 20 years. They came to us and said, well, why don't you just run this hedge for us? And, and don't use, don't use margin and, and be less than a hundred percent invested and we'll, we'll take the, the long side of the portfolio and we'll judge you accordingly, i.e. on an alpha basis. And that changed our business model overnight.

• 45:00Speaker 05

  And so really for the last 30 years, we have been running portfolios that are much less concentrated than people think. And, you know, if you go onto Twitter, people would think that I'm only short Tesla and like three other stocks. And of course, I just, I like to, to write about Tesla and three other stocks, but we are short 40 names in various levels, well below a hundred percent invested and hedged. So we're, we're much more conventional in that respect than I think people think and you thought.

• 45:38Scott Galloway?

  I think our listeners are probably interested in knowing what some of those names are. Before I move on, could you share some of those names that you're short on?

• 45:46Speaker 05

  Well, again, we, we've written about a number of them, public and public forums on, on some of them that I just find highly questionable, like, like the Neo Clouds and Mr. Musk's two companies.

• 46:02Scott Galloway?

  Both Tesla and SpaceX are in that.

• 46:04Speaker 05

  Tesla and SpaceX, yes, yes. I prefer my CEOs to have a, a more, a more, shall we say strengthened relationship with the truth. We, and then for years and years, we were short, we were short a significant amount of portfolio in China, which we aren't anymore. And that, that kept us in pretty good stead from 2010 to 2020 because of just how crazy that market is and how crazy that economy was based on real estate. And, and that's now completely reversed and that trade has moved on.

• 46:49Speaker 05

  But it's, it's, it's important to remember this doesn't always just happen here.

• 46:55Scott Galloway?

  We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com.

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• 50:16Ed Elson?

  We're back with Prof G Markets. One of my favorite adages in short selling, which I feel like just sums it all up, is that the market can stay irrational longer than you can stay solvent. And I find that to be an important point. And my takeaway is that the name of the game of short selling isn't actually to be correct. It is to know when the market will agree with you that you are correct. And to me, those are two very, very different games. And I feel as if it's sort of under discussed when it comes to short selling. I feel this personally because a lot of the content that we talk about on this show is, look at all of these bubbletious trends that we're seeing in the market.

• 51:00Ed Elson?

  And then everyone says, yeah, but the market's going up. So I guess, how do you think about that problem? And how do you, do you agree with my takeaway that it's actually about timing?

• 51:12Speaker 05

  After 40 years, I will make one observation about that statement. And that is, I tend to hear it right before the bulls are the ones that become insolvent. So it's, you have to be a little bit careful when people say, well, yeah, of course, you know, prices are crazy, but so what? They can get crazier. And at that, at that point, the bears have already taken their pain and have left the field or reduced their risk or whatever. And it's usually the unsophisticated investor who's on margin, who's about to get killed. But setting that aside, it gets back to the point of portfolio construction and diversification.

• 51:54Speaker 05

  And there's just lots of businesses you can analyze. And Scott knows this better than me or you, Ed, that just make no sense, right? Where the just, the returns aren't there, the returns will never be there, a dream is being sold, or the returns are below the cost of capital and they're using debt to finance it, or what have you. And, and the failure rate in business is quite high. And most companies fail. You just have to avoid the ones, the 2% that, you know, not only prosper, but, but go on for 50 and 60 and 70 years.

• 52:35Speaker 05

  Because that's where people make most of their money on the long side via indices. It's the successes. And, and most companies fail. So again, if you watch your risks and mitigate your risks and avoid the, the 100 Xs, generally you can do pretty well on a diversified hedged short portfolio.

• 52:58Ed Elson?

  For a listener who's hearing this and is in total agreement with you on the risks in AI, some of the problems and some of those names that have just gotten flat out, overvalued over their skis, what should they actually do in their investment portfolio? Like, is this the moment where you, I mean, do you, do you sell anything? Do you go short anything? What would be your advice?

• 53:24Speaker 05

  One thing I would just tell investors is, if you have a portfolio full of companies that are based, that aren't going to be profitable for five years, you know, you might want to start trimming those, right? If, because predicting the future, I've found over 40 years, is really, really hard. And, and the further out you go in predicting the future, the harder it gets. And, and so if, if, you know, your favorite sell-side analyst is telling you, well, the stock is cheap at only 40 times 2035 EBITDA, you know, maybe step aside.

• 54:04Speaker 05

  Because it, it really is, that's where the, that's where the blow-up risk in your portfolio resides. In terms of, and there's lots of those companies right now, where because of AI, whatever, they're being built literally as castles in the sky based on 2030 or 2035, you know, hopes of profitability. And they're not cheap on those metrics. So I think if you can find companies that are doing well now, are making profits now, will probably make more profits if the boom continues, you'll generally be in good stead than buying, you know, a Bitcoin miner that's losing hundreds of millions of dollars, but

• 54:49Speaker 05

  is telling you they're going to make a dollar a share in 2030, then the stock's at 60. That's one practical thing I can tell investors. At this point in the cycle, you should be sort of pruning your portfolio of those stories.

• 55:03Ed Elson?

  What about investing in index funds at this point? Because I think that's sort of the classic safe move when it comes to equity investing. But to your point, a lot of the names in the S and P are overvalued. There has also been this massive influx of passive investing, which arguably might be propping up a lot of these names. And it's generally expensive. I mean, is investing in the S and P, either the equal weight or regular S and P, does that hold more risk at this point than it did before?

• 55:37Speaker 05

  I own it, so.

• 55:41Speaker 05

  I'm not the one to ask because I've got, I've got these 40 radioactive companies against it, right? So I'm probably not the right person to say, even though I think it is expensive, you know, I own the indices.

• 55:54Ed Elson?

  Which is one of the dilemmas for, for basically everyone. I mean, you'd be hard pressed to find any investor who isn't, doesn't have significant exposure to the S and P. But then perhaps many of us are also agree, as you do, it looks, looks pretty expensive, which puts us in a tough spot.

• 56:09Speaker 05

  But again, it's hard to time the market and, and most investors, you know, should have beta in their portfolio. Most investors should be exposed to the stock market. It's just a matter of how much and where and what your risk tolerance is. But I would never tell anybody, you know, a young investor or a mid, a midlife investor, you know, get out of the stock market because it's expensive. I, I have no idea. It might get more expensive, as we discussed.

• 56:38Scott Galloway?

  You discover something, you think, okay, there's just way more risk to the downside than risk to the upside. We've discovered something. You, that's half, it strikes me, that's kind of half the battle because then what you want is to ensure that other people discover what you've already found. And you have been very adept at, you make these, you do research, you go on media. Talk a little bit about how structured or planned, do you have a system for helping, you're arguably the most famous short seller in the world. So you clearly have an ability.

• 57:14Speaker 05

  Scott, that's a very low bar. There's an old partner of mine, you say, that's like being called the toughest guy in France.

• 57:20Scott Galloway?

  I'll come back to that because what I will say is, I think a lot of that is fear of shame. And that is, I, I put out a post, I think five or six years ago, where I said Oyo and Snap and WeWork were just dramatically overvalued. And I have never seen that kind of pushback, anger, character assassination, saying I'm an evil person, as I registered from the, the valley who had all, you know, marked their portfolios. I, I just couldn't get over, it, it's as if I'd said that their parents were war criminals or something. I've never, so I think a lot of, a lot of what you endure, quite frankly, is you have

• 58:01Scott Galloway?

  to have thick skin because you can, you can lose a shit ton of other people's money promoting a stock, but God help you if you start shitposting a stock. The, you know, everybody, it feels like I, what I register, I can't believe the hate you get and when anyone questions a stock. It's like, it's almost like it's counter-cultural. You're not, you're being non patriotic. But Jim, where I was headed with this before I started feeling sorry for myself was, was what did, does your firm have a structured approach in investment capital in terms of your own time and money around getting the word out? What is your media strategy around your favorite shorts?

• 58:39Speaker 05

  There is no media strategy other than doing occasional podcasts and, and, and my social media account on X. And, and, and again, we try to just point out things that are public and, and our opinions on things that are public. That's what makes prices, right? People's, people's opinions about facts. But you're right, there's an asymmetry there that is, that is completely hard to ignore, that, that if you impugn a company that people own, they take it quite personally. I, I went through that and you, you did it WeWork, which I, to this day, I still can't believe still came public. But, because we,

• 59:20Speaker 05

  we got shorted on the IPO. But in the, the, the post GameStop era, you know, we were, we were pretty publicly short AMC. And, and, and, you know, the, the AMC apes were, were quite the, quite the group. And one of my rules is if any stock has a community, it automatically merits a look on the short side, you know? But, but, but, but we went through it all again last year in, in what was maybe the greatest classic arbitrage trade I've ever seen in my life, which was of course, being long Bitcoin and being short MicroStrategy.

• 1:00:00Speaker 05

  At its peak, there was an $80 billion difference in the value of MicroStrategy versus the value of its Bitcoin holdings, which you could easily hedge. And you could easily short the MicroStrategy component of it and earn full short rebate. And I've never seen, I mean, I remember the 3com palm spin up back in 2000 and a variety of other sort of classic arbitrages that were interesting and maybe were a couple billion dollars that were hard to implement by putting on the short leg, whatever. But this was $80 billion

• 1:00:39Speaker 05

  in December of 2024, and you could do it literally as much as you wanted. And unbelievably, the company helped you out by selling a billion or two billion of common equity every week to, to do, to close the spread. And, and the vitriol we got online for, for challenging the genius of MicroStrategy and, and creating this Bitcoin treasury company that was a perpetual motion flywheel was just, I think, one for the efficient market hypothesis academics to study for, for a while because it should never have existed.

• 1:01:22Ed Elson?

  So you, you shorted Enron in 2000 before it went bankrupt. And it seems that, I mean, there are, there are companies where their multiples have gotten too high, there's too much speculation, too much euphoria, and those multiples must come down. And then there are companies which are either fraudulent or their businesses don't work or they're at risk of bankruptcy. Enron was one of those companies and you were right about it before anyone else. I guess the question becomes, you know, yes, you might see a few companies that are doing something shady or their business models don't work. But the larger

• 1:02:02Ed Elson?

  question is, is that indicative of a larger problem that could bring the markets down?

• 1:02:09Speaker 05

  It's one of the themes of the course on the history of financial market fraud I teach. And that the fraud cycle follows the financial cycle with a lag. And the longer the financial cycle goes on, the more amount of fraud is ultimately uncovered on the down cycle. So I've already dubbed this the golden age of fraud. And I suspect that when we're on the down part of this cycle, the bodies will float to the surface as they always do. But remember, the other, the corollary to that is, is, is the harshest prosecutor and the staunchest defense attorney of a company is its stock price. Nobody, nobody

• 1:02:53Speaker 05

  goes after frauds at all time highs. They only go after them after investors have lost money because these kinds of things are political. And, and, and the resources to prosecute corporate fraud are political. And it wasn't until Enron and WorldCom and Tyco and others had collapsed in 02, that the public, you know, demanded scalps because it wasn't the fact that they overpaid for lots of companies and lost money in the stock market. It's because these were corporate crooks. And I think we will see the same, same thing happen

• 1:03:36Speaker 05

  in this cycle, except with, for the possible exception of the fact that a lot of these guys might get pardoned first.

• 1:03:45Ed Elson?

  Do a whole other podcast on that. I'll, I'll start to wrap us up. Would you, do you have any advice for young investors? I mean, you seem to be very good at spotting BS in general. How do you do that? And what advice would you give to young people who are looking to build out their portfolios?

• 1:04:09Speaker 05

  Well, I mean, again, I, I think we've already talked about some of it. I keep, keep it passive. It, it's, it's tough to get into the weeds with the professionals. It's hard enough to make money really digging into these companies and trying to figure out what they're worth. And, and most professionals don't add value doing that. So as an amateur doing it, you're still probably better off keeping your costs down and saving as much as you can and just putting it in the market at a young age. That's the, that's the simple. And it may sound trite, but it's the right advice. And, and if you want to play around with some of your capital as a young investor and, and, and, you know, chase a hot story

• 1:04:51Speaker 05

  or, or, or put money on something that you think is, you know, is, is the next Nvidia, you know, go to it. You can take the risk, but don't do it with all your capital. And that's what I find most young investors right now are way too concentrated. They own one or two or three stocks and, and, and are betting everything on them. And when things go wrong, it's hard to recover from that. So just take a small part of your portfolio and, and go chase SpaceX or whatever, you know, whatever you think might be, you know, mining asteroids 10, 10 years from now. But with the bulk of your capital, you know, put it, put it in index funds and, and just let it grow.

• 1:05:35Ed Elson?

  Jim Chanos is the founder and managing partner of Chanos and Company, formerly known as Kynikos Associates, the world's oldest exclusive short selling investment firm. Jim launched the company in 1985 to implement investment strategies he uncovered while beginning his Wall Street career as a financial analyst with Payne-Webber, Guilford Securities and Deutsche Bank. Throughout his investment career, Jim has identified and sold short the shares of numerous well-known corporate financial disasters. Jim has testified before Congress and provided comments to regulations proposed by the U.S. Securities and Exchange Commission and the Financial Services Authority in the UK. He is currently a lecturer in finance at both the Yale School of Management and the University of Wisconsin School of Business, where he teaches a popular class on the history of financial fraud. Jim, we

• 1:06:19Ed Elson?

  really appreciate your time. Thank you.

• 1:06:21Speaker 05

  My pleasure, guys. Thank you.

• 1:06:33Scott Galloway?

  Scott, what did you think? Well, he's definitely a legend. When they talk about, when they talk about finance and investing in this era, I think no book would be complete without talking about Jim, Jim Chanos. What struck me was, quite frankly, he's just more reasoned and measured. And I mean, it sounds like he's running a hedge fund that is really well diversified, big on the long side with perhaps more thoughtful or robust hedging. As opposed, I'm not sure describing him as a short seller is, is an accurate description at this point, because he acknowledges that the markets go up and you want to be in the market, but a lot of the advice he gives to young people, quite frankly, it's the

• 1:07:16Scott Galloway?

  exact same advice we give, be diversified, be in the market, low cost, don't go too big on any one thing, don't be too concentrated. But I was struck at how, I would have thought he was a little bit more, quite frankly, cavalier and pounding the table on how insane some of this stuff is. He just struck me as very measured and for lack of a better term, very adult.

• 1:07:38Ed Elson?

  Yeah, I think that's exactly right. I mean, I want to invest in his fund.

• 1:07:42Scott Galloway?

  Yeah, it sounds like a good fund, right?

• 1:07:45Ed Elson?

  I mean, there's not one thing that came out of his mouth that I don't agree with. Literally every, everything he said, from, from what he's short on to what he's long on to the fact that we, you don't have much of a choice than to invest in the S and P. And the fact that he recognizes like, yeah, technically I'm, I'm long that it can be, it can be expensive, but that doesn't mean you go out and sell your, sell your S and P. I mean, you, you take the drawdown, but then you recognize that over the long term, it's going to go up and to the right. And then you also recognize that there are some bags of shit as well out there in the market, and those are the companies that you can go short on.

• 1:08:30Ed Elson?

  And I agree with all of his picks. I mean, the Neo clouds and core weave, maybe it's like, I'm, I'm just, I want to invest.

• 1:08:41Scott Galloway?

  Yeah, the, the piece of data that buttress what we're talking about is that if you believe social media, you think that he mortgaged his house and, and levered up, you know, three to one to just go short Tesla. And what he said that I thought was illuminating was Tesla's never been more than two or 3% of his portfolio, the short, on the short side.

• 1:09:00Ed Elson?

  And he had to trim it down as it kept on rising. And yeah, by the way, Tesla is getting crushed. And, and something I pointed out on social media, if you invested in Tesla in November of 2021, you would be down at this point around 20%. So have, there's a little caveat there, which is it was, it's been extremely volatile throughout it. But what I'm a little bit sick of hearing is this idea that Tesla has been this roaring stock that has just crushed over the past five years. Actually, it hasn't. It has been extremely volatile and depending on when you invested, you might be significantly down on that position over a long period of time.

• 1:09:43Ed Elson?

  Just want to put that out there because I know that you've been short.

• 1:09:46Scott Galloway?

  Well, you know, I never liked to say anything negative about Elon Musk, so I'm just going to keep quiet.

• 1:09:51Ed Elson?

  Fair enough. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Shalane, Kristen Adonichu and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

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